YPSILANTI — Philip
Incarnati, chairman of the Eastern Michigan University Board of Regents,
said today that the findings of the Office of State Auditor General’s
Performance Audit of University House would help the University improve
its business practices.

The audit, initiated in September 2003 at the request of the Michigan
legislature, was released to the public this morning and included four
recommendations and findings. The University agreed in principle with
all of the recommendations, although it noted several exceptions to
the findings in its preliminary responses, Incarnati said.

“It’s not unusual for management and auditors to have
differences of opinion regarding processes used in any project. The
important thing is, with the exception of not filing a Use and Finance
Statement, the audit found no violations of State statutes,” Incarnati
said.

Two of the recommendations, that the University obtain approval before
using operating revenues to fund capital outlay projects, and that
it comply with annual appropriations acts with respect to capital outlay
projects, were the direct result of the University not filing a timely
and accurate Use and Finance Statement, Incarnati said. A Use and Finance
Statement is required when state-supported universities and community
colleges build or renovate facilities costing more than $1 million
in institutional resources.

“The University’s failure to file a Use and Finance Statement
was an oversight. When the University was notified that it had violated
the law, it immediately submitted the appropriate forms. Unfortunately,
the filing was late and the document was inaccurate. The University
has since implemented new procedures to ensure that it is in compliance
with the law,” Incarnati said.

Much of the performance audit focused on how funds were accounted
for by the University. “First, it’s important to say that
having undergone months of scrutiny and two audits, that there were
no instances cited where individuals acted outside the scope of their
authority, and all funds were accounted for,” Incarnati said. “The
discrepancy in published reports regarding the cost for the House really
centers on how you define the project.”

The University’s working definition of capital projects was
developed many years ago from the Use and Finance Statement regulations
that require the estimated cost of “services from five feet outside
of the structure.” Similar language is used in the State
of Michigan Department of Management and Budget’s Design and
Construction Division’s Major Project Design Manual for Professional
Service Contractors, State Universities, Community Colleges and State
Agencies,
John Beaghan, EMU’s interim vice president for business and finance,
said. “Using that definition, actual costs were $3.58 million
against our projected budget of $3.5 million.”

Beaghan said that the University has never disputed that additional
dollars were spent outside of the project to develop the property,
but that those funds were properly budgeted and accounted for in accounts
designed for those purposes. “We funded landscaping through the
Campus Beautification budget, for example,” Beaghan said. “This
is consistent with how we have historically funded and reported expenditures.
The auditor recommended that these costs be included in the project
account. We reported that we spent $3.5 million on the project, plus
an additional $1.8 million on land acquisition and site development
for a total of $5.3 million. The Auditor says that we spent $6 million;
the $5.3 million we recognize as legitimate costs, plus an additional
$700,000 in related costs. We don’t agree that this $700,000,
which includes costs such as maintaining the Stonebridge residence,
fixing the auxiliary property on Forest Avenue and the Deloitte & Touche
audit, should be included.”

Since expenditures outside the project definition were within the
authority of the administration to spend, those funds were not reported
to the Board as part of regular construction updates. This, the auditor
pointed out, led to the Board not being totally informed.

“Although the accounting and reporting for this project were
the same as for all other construction projects, we learned that we
need to do business differently,” Incarnati said. “We’ve
already implemented new reporting procedures so that all dollars expended
on a project are reported regardless of the funding stream.”

The Auditor’s opinion that the project was not properly managed
met with strong objection by Beaghan. “This was a broad statement
for the auditors to make, given that they only noted one reportable
condition: concerns about the bidding process. We acknowledged that
we did not properly file a log of the bid opening and that we accepted
an incomplete landscaping proposal. However, all other requirements
of the bidding process were met or exceeded,” Beaghan said. “The
auditors’ comments about proper oversight also go to the question
of how the project was defined. With our long-standing definition,
all the costs were properly recorded and we managed the project very
well.”

One finding that surprised both Beaghan and Incarnati was that approximately
$200,000 of interest income was paid through tuition and fees. “Due
to a timing difference in the execution of an option to refinance debt,
this sum was not recognized as an addition to our debt service.”

“It was clearly not the Board’s intent to use any tuition
or fees on the House (the structure plus the 10-foot perimeter),” Incarnati
said. “I’ve instructed administration to utilize unrestricted
royalty revenues to reimburse this amount to the University’s
general operating revenues account to rectify the use of tuition and
fees.” Incarnati added that he was disturbed that the Auditor
tried to make a connection between the cost of the House and increasing
tuition rates. “Clearly there is no connection whatsoever.
At the same time EMU raised tuition, so did every other institution
in the state. The tuition increases were tied to the rising cost of
delivering instruction and services coupled with a decrease in state
appropriations.”

University House, a multipurpose facility that serves as the University’s
venue for friend raising and fundraising, as well as the president’s
residence, is a valuable asset for the University, Incarnati said. “We
need to increase donations and the size of our endowment. University
House is helping us to do that. Since its opening, more than 4,000
individuals have visited the facility and in the last fiscal year,
our cash donations increased by 35 percent,” Incarnati said.

“It’s not always pleasant to have someone put your operations
under a microscope, but it is useful,” Beaghan said, “and
although we disagree with some of the findings, the audit will help us
improve our operations. In the end, that’s the value.”

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Eastern Michigan University is a public, comprehensive
university that offers programs in the arts, sciences and professions.
EMU prepares students with the intellectual skills and practical experiences
to succeed in their career and lives, and to be better citizens.